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Trouble Coming to Paradise

By: Gordon Long | Friday, February 8, 2013

The Macro Indicators are signaling there is potential trouble coming to paradise.

Goldman Sachs points out in a recent
study that there is a remarkably strong correlation which has emerged
as a result of global central bank policy initiatives. The steely eyed Tyler
Durden at Zero
Hedge points out:

As the chart below indicates, it really is different this time as the macro
cycle has become extremely short and consistent (drop in H1, rise in H2) -
and is evident not just top-down but bottom-up in payrolls and ISM for instance.
Goldman expounds pages of statistical jiggery-pokery to show what we suspected
- that this is not weather or seasonality effects, and is not just US
(UK and Europe see same pattern of six month cycles); but appears driven
by central-bank policy actions (which have been more concentrated in Q4/Q1).
2013 is playing out exactly as the last three years has - with a downdraft
that is set to continue for the next few months - though they note that
stability in oil prices this time (and recent expansion of easing efforts -
Fed and BoJ) may shift the pattern. For now, it appears the macro cycle is
becoming shorter and warrants concern as they are unable to find anything but
'reality' as a driver of this odd cyclical pattern as the real economy fades
rapidly after each and every infusion of promises from the Central Banks.

US Macro data is following the same downward path as we have seen for the
last three years...

Given that we are now in the part of the year that has typically presaged
macro weakness, we will be paying close attention to developments in
fundamental factors: policy, financial conditions, oil prices, and shocks
from the rest of the world and the Euro area.

Put simply, each year central banks lift their foot modestly to see just
what is going on in the real world, and each year the reality is not good
- which then pushes them back into action; the question is (with BOJ not
going open-ended until 2014, OMT off the table for Spain for now, and Fed
QE4EVA 90% priced in) when will the central banks come back and with what...

Charts: Goldman Sachs

Separately, we have noticed that each of the REGIONAL Economic Surprise Indices
are also ALL following the same pattern GLOBALLY.

The above chart also suggests that economic "reality" is once again
not meeting the analysts' growth and market expectations. This has become an
annual event.

Death Cross

The ECO pattern is clear. A 'death cross' of the 100 DMA through the 200 DMA
is a strong confirming signal that a sustained change in perceptions is now
underway.

As JP Morgan's Tom Leepoints
out, the US Citigroup Economic Surprise Index (below) has moved
below zero. On the past 7 occasions when this happened the near-term equity
upside was capped. The average maximum upside of 1% and average drawdown
of 8% seen over the following 3 months demonstrate the asymmetric risk-reward
in our view.

.... as you can see in the close up below, the rise in oil prices six months
ago suggests we see a peak in economic positive surprises and the stock market
in late February to early March. Given we likely have a peak in economic
activity and the stock market in 4-6 weeks based on prior oil prices, even
if interest rates breakout their run is likely to be short-lived and a plunge
in interest rates and rise in real interest rates (if nominal rates fall
faster than inflation) may be the catalyst that sees gold stabilize and begin
to advance.

We have an endless array of charts showing extreme market levels but three
of note are:

Earnings Decidely Negative

There has been some confusion about the quality of the ongoing Q4 earnings
season, which has seen some 47% of the S&P 500 companies report to date
(and with 53% still left things can certainly change). The confusion apparently
is that this has been a "good" earning season so far. Nothing
could be further from the truth, and as Goldman shows in its midterm Q4 earnings
report, the reality, not spin, is that earnings are tracking at
$24.03, or some 6% below the consensus estimate at the start of earnings
season of $25.51. This revised number, which could well drop even more
from here, means that Q4 earnings will post a minuscule 1% growth in EPS
year over year compared to Q4 of 2011 when Europe was imploding, and when
the world's central banks had to arrange a global bailout to prevent yet
another Armageddon.

Here are the facts:

Using a mix of realized and consensus earnings, 4Q EPS is tracking
6% below the consensus estimate at the start of reporting season, $24.03
vs. $25.51

Positive earnings surprises are tracking below average this quarter
(34% vs. 42%). The percentage of firms missing earnings estimates
by one standard deviation or more is above the 40 quarter average (18%
vs. 14%).

36% of firms beat consensus sales expectations by more than one standard
deviation, below the 10-year historical average of 38%.In addition,
19% of firms have missed sales estimates by that magnitude (versus 18%
historically).

In summary, the S&P 500 is expected to earn some $98 for all of 2012,
which means that as of this moment, the market is trading at a quite rich
15+ multiple (although what multiples mean under central planning nobody
knows yet). So how does the S&P500 go from 98 in earnings in 2012, to
the consensus 111 in S&P500 EPS in 2013? A magic escalator apparently.

Bottom Line - S&P 500

We are now in the early stages of shifting from an extreme condition of complacency.
This has been coupled with elevated levels of a potential economic or geo-political
shock to the market and OVER OPTIMISTIC INVESTOR SENTIMENT.

Conditions are suggesting we have a RISK-OFF environment looming ahead of
us before the Ides of March..

Gordon T. Long has been publically offering his financial and economic writing
since 2010, following a career internationally in technology, senior management & investment
finance. He brings a unique perspective to macroeconomic analysis because
of his broad background, which is not typically found or available to the
public.

Mr. Long was a senior group executive with IBM and Motorola for over 20 years.
Earlier in his career he was involved in Sales, Marketing & Service of
computing and network communications solutions across an extensive array of
industries. He subsequently held senior positions, which included: VP & General
Manager, Four Phase (Canada); Vice President Operations, Motorola (MISL -
Canada); Vice President Engineering & Officer, Motorola (Codex - USA).

After a career with Fortune 500 corporations, he became a senior officer of
Cambex, a highly successful high tech start-up and public company (Nasdaq:
CBEX), where he spearheaded global expansion as Executive VP & General
Manager.

In 1995, he founded the LCM Groupe in Paris, France to specialize in the rapidly
emerging Internet Venture Capital and Private Equity industry. A focus in
the technology research field of Chaos Theory and Mandelbrot Generators lead
in the early 2000's to the development of advanced Technical Analysis and
Market Analytics platforms. The LCM Groupe is a recognized source for the
most advanced technical analysis techniques employed in market trading pattern
recognition.

Mr. Long presently resides in Boston, Massachusetts, continuing the expansion
of the LCM Groupe's International Private Equity opportunities in addition
to their core financial market trading platforms expertise. GordonTLong.com
is a wholly owned operating unit of the LCM Groupe.

Gordon T. Long is a graduate Engineer, University of Waterloo (Canada) in
Thermodynamics-Fluid Mechanics (Aerodynamics). On graduation from an intensive
5 year specialized Co-operative Engineering program he pursued graduate business
studies at the prestigious Ivy Business School, University of Western Ontario
(Canada) on a Northern & Central Gas Corporation Scholarship. He was subsequently
selected to attend advanced one year training with the IBM Corporation in
New York prior to starting his career with IBM.

Gordon T Long is not a registered advisor and does not give investment advice.
His comments are an expression of opinion only and should not be construed
in any manner whatsoever as recommendations to buy or sell a stock, option,
future, bond, commodity or any other financial instrument at any time. While
he believes his statements to be true, they always depend on the reliability
of his own credible sources. Of course, he recommends that you consult with
a qualified investment advisor, one licensed by appropriate regulatory agencies
in your legal jurisdiction, before making any investment decisions, and barring
that, we encourage you confirm the facts on your own before making important
investment commitments.

The information herein was obtained from sources which Mr. Long believes reliable,
but he does not guarantee its accuracy. None of the information, advertisements,
website links, or any opinions expressed constitutes a solicitation of the
purchase or sale of any securities or commodities. Please note that Mr. Long
may already have invested or may from time to time invest in securities that
are recommended or otherwise covered on this website. Mr. Long does not intend
to disclose the extent of any current holdings or future transactions with
respect to any particular security. You should consider this possibility before
investing in any security based upon statements and information contained
in any report, post, comment or recommendation you receive from him.